Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2023 Earnings Call Transcript
Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2023 Earnings Call Transcript February 28, 2024
Vertex Energy, Inc. misses on earnings expectations. Reported EPS is $-0.74 EPS, expectations were $-0.14. Vertex Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jeannie and I will be your conference operator today. I would like to welcome you to the Vertex Energy Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to John Ragozzino. You may begin your conference.
John Ragozzino: Thank you. Good morning and welcome to Vertex Energy’s fourth quarter and full year 2023 results conference call. On the call today are Chairman and CEO, Ben Cowart; Chief Financial Officer, Chris Carlson; Chief Operating Officer, James Rhame; Chief Strategy Officer, Alvaro Ruiz; and Chief Commercial Officer, Doug Haugh. I want to remind you that management’s commentary and responses to questions on today’s conference call may include forward-looking statements, which by their nature are uncertain and outside of the company’s control. Although these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ materially. For a discussion of some of the risk factors that could cause actual results to differ, please refer to the Risk Factors section of Vertex Energy’s latest annual and quarterly filings with the SEC.
Additionally, please note that you can find reconciliations of historical non-GAAP financial measures discussed during our call and on the press release issued today. Today’s call will begin with remarks from Ben Cowart, followed by an operational review from James Rhame, a financial review from Chris Carlson, and a review of our commercial strategy by Doug Haugh. At the conclusion of these prepared remarks, we will open the line for questions. With that, I’ll turn the call over to Ben.
Ben Cowart: Thank you, John, and good morning to those joining us on the call today. 2023 was a year marked by significant volatility in the refining and renewable sectors. This instability was driven by several factors, including geopolitical tensions that affected crude oil and products pricing. Additionally, shifting supply and demand balances had a profound impact on renewable credit values and lagging feedstock costs. In the midst of these fluctuations, 2023 also marked a significant shift in the evolution and growth of Vertex Energy as a company. Throughout the year, our focus was on launching a renewable business and optimizing our feedstock strategy following the construction and start-up of the renewable diesel unit at the Mobile Refinery.
In addition, we have expanded our logistics footprint in Mobile through our marine fuels and logistics operations and establish our trading and supply division, creating significant opportunities to vertically integrate the broader business and capture more of the value chain along the way. With the Mobile Refinery purchase, we have invested roughly $260 million of new cash into the renewable diesel business today, including fixed assets, the cash portion of working capital for inventory, and funded losses through the year end 2023. We have grown our corporate overhead to support this growth and bring in the talent needed to drive progress towards our overall goal as a leading energy transition company. Given our accomplishments in the startup and the development of these initiatives, we believe we are well positioned to refine our strategy, concentrating now on cash management, cost reduction and enhanced profit margins.
On the call today, the team and I plan to update you on the financial and operating results for the fourth quarter and full year 2023. But I want to start by thanking my team, all the employees listening to the call today for the good work they have accomplished throughout the year. As James will note shortly, we not only got a lot done, but we did it safely, which is the most important measure of all. Before I hand the call off to James, I know many of you are eager to get an update on the ongoing process underway with Bank of America. As we’ve communicated, we are evaluating various alternative strategies to free up some liquidity and strengthen our current balance sheet position. We are continuing to work the process. We’re encouraged by the progress made.
And I hope to bring this to resolution sometime during Q2 of this year. We fully intend to update the market once we have tangible information to share. With that, I’ll now hand the call over to James.
James Rhame: Thank you, Ben. Good morning, everyone. I will start as always with our report on health, safety and environmental performance. The fourth quarter of 2023 was another clean quarter with zero OSHA recordable injuries. We did have 4 minor environmental non-compliances at the Mobile site associated with the planned power outage. Additionally, Mobile saw zero process safety events, continuing the streak of outstanding EH&S performance at the site. For the full year 2023, our environmental, health and safety performance reflects a great achievement by our team, which I’m extremely proud of. After acquiring the Mobile facility, the team was immediately put to test as our conversion of the RD facility was a monumental task as the site executed a project with multiple times as many boots on the ground as normal for the better part of the year.
Throughout this period of unprecedented busyness with hundreds of unfamiliar faces on the site, the fact that the team was able to successfully maintain daily operations without serious injury or environmental damage and no disruption to our surrounding neighbors and community demonstrates the diligence, skill and commitment to quality of each of our employees. I’m extremely proud of our legacy business also as that group saw a reduction of 90% year-over-year in OSHA recordables. I’m proud of our employees at every location, who are continuing to prioritize the safety-first mentality of our entire organization, and I must say thank you to all of our dedicated employees and contractors. The effort and care for each other seen across the entire business is a testament to the employees and contract partners that work within our facilities.
Our team at the Mobile site demonstrated strong operational performance of the conventional facility during the quarter, with average throughput volumes of 67,083 barrels per day for a capacity utilization of 89%, consistent with the updated guidance of 67,000 barrels per day in January. The lower volumes reflect the combined impact of a strategic curtailment of throughput in light of deteriorating market conditions during the quarter as well as previously disclosed downtime to proactively replace an electrical transformer. Total OpEx per barrel for the fourth quarter was in line with our guidance at $3.83 per barrel and reflects increasing cost efficiencies gained from smooth operation, which more than offset the inflationary impact of lower throughput volumes on a cost per barrel basis.
Our conventional fuels gross margin per barrel during the quarter was $4.79, reflective of the challenging market conditions encountered in the conventional fuels markets during the quarter. At the onset of the fourth quarter, market prices for finished motor fuels, including gasoline and diesel began a sharp correction and continued this downward trend throughout the first 2 months of the quarter before finally reversing course in early December. The weakness in fuel prices for much of the quarter has a significant negative impact on our fuels’ gross margin per barrel in our conventional fuels business. However, just as quickly as prices began the downward trend, at the beginning of the quarter, they have steadily rebounded since early December and through most of the first quarter of 2024.
Our finished products such as gasoline, diesel and jet fuel accounted for 66% of our total product yield during the fourth quarter 2023. This was in line with our guidance and reflecting continued focus on facility-wide yield optimization as we’ve previously described. Now turning to our renewable fuels business. Vertex’s renewable diesel plant operated smoothly, generating total renewable fuels gross margin per barrel of $12.11 for the quarter. Our fuel gross margin for fourth quarter 2023 included $6.1 million of benefit attributed to production volumes from the second and third quarters. Adjusting for the third quarter LCFS credit, our fuel gross margin per barrel for the fourth quarter was approximately a negative $4.78. Our renewable throughput volumes averaged 3,926 barrels per day for capacity utilization of 49%, in line with our recently updated guidance.
As Chris will detail in a moment, our crude oil throughput projections for the first quarter are expected to be between 60,000 and 63,000 barrels per day. We’ll have a planned small turnaround of one of the reformers and a pit stop of one of the crude units during March as we prepare the plant for generally higher margin periods in the second and third quarter ahead of gasoline demand during the driving season. We have seen margins increase in the first quarter and have accelerated crude throughput volumes in conjunction with the improved margin environment. Looking out to the remainder of 2024, we continue to make good progress on the development of Phase 2 of our RD conversion project as well as the work necessary to qualify additional feedstocks.
We continue to believe in our expansion of 14,000 barrels a day is on track for completion in the first quarter of 2025 as we’ve previously communicated. The RD business continues to be challenging in 2024 as we use this time to develop capabilities and operate in the unit as well as understand the differences with various feedstock slates, which Doug Haugh will expand on in a moment. Moving quickly over to our legacy business. Operational performance in 2023 for Marrero was outstanding as they saw a 4.4% capacity improvement year-over-year. And we also saw a 23% increase in collection volumes in our Collections business through our UMO collection operation. Both of those groups have had a excellent 2023. I will now turn the call over to Chief Financial Officer Chris Carlson for a review of the company’s financial results and additional detail regarding our financial and operating outlook for the first quarter of 2024.
Chris Carlson: Thank you, James, and welcome to those joining us on the call today. Before reviewing our detailed financial results for the fourth quarter and full year 2023, I want to reiterate our continued focus on the improvement of our balance sheet. The elimination of our high-interest term loan and convertible notes has been a key component of our overall strategy following our transformational acquisition of the Mobile facility in 2022. Over the course of 2023, we made notable progress towards this goal with the announcement of our private exchange of approximately $80 million of our 6.25% convertible notes due 2027. We expect to continue our pursuit of this strategy, utilizing the most efficient tools accessible to us along this path.
Turning now to our financial results. Vertex reported net loss attributable to the company of $63.9 million for the fourth quarter and $71.5 million for the full year 2023. This compares to $44.4 million and $4.8 million reported in the fourth quarter and full year 2022, respectively. Total adjusted EBITDA loss of $35.1 million in the fourth quarter and $17.1 million for the full year 2023 compared to $75.2 million and $161 million in the prior year period, respectively. During the quarter, we recorded operating cash flow before changes in working capital of negative $43.6 million. Total capital expenditures for the fourth quarter of 2023 were $11.7 million, 33% below our prior guidance issued on November 7, reflecting a deliberate preservation of capital achieved via a deferral of certain discretionary capital expenditures.
This primarily includes a realignment of planned capital expenses for Phase 2 of the renewable diesel project with external time line. The deferred timing of these Phase 2 expenditures has not directly impacted the project schedule. Turning to the balance sheet. As of December 31, 2023, the company had total cash and equivalents, including restricted cash of $80.6 million versus $79.3 million at the end of the prior quarter. Vertex had total net debt outstanding of $205.5 million at the end of the fourth quarter, including lease obligations of $68.6 million, implying a net debt to trailing 12-month adjusted EBITDA ratio of 12x as of December 31, 2023. As previously announced, on January 2, 2024, we reached an agreement with our existing group of lenders to modify certain terms and conditions of the term loan agreement.
The amended term loan provides for an incremental $50 million in borrowings, the full amount of which was borrowed upon closing on December 29, 2023, and therefore, reflected in our year-end cash position of $80.6 million. During a period of rapidly eroding fuels margins encountered in the fourth quarter, we took the opportunity to shore up the balance sheet with additional cash provided by the amendment in order to support adequate financial flexibility through the completion of our ongoing process with Bank of America aimed at evaluating strategic opportunities. Relative to the other tools available in the market to us at the time, we maintain our view that the term loan amendment presented the most efficient means of achieving our goal in the short term after considering several alternatives.
We continuously monitor current market conditions and assess our expected cash generation and liquidity needs against our available cash position using the current forward price spreads in the market. Looking to the first quarter of 2024, we anticipate total conventional throughput volumes at Mobile to be between 60,000 and 63,000 barrels per day. Our expected yield of conventional products is expected to consist of between 64% to 68% high-value finished products, such as gasoline, diesel and jet fuel, with the balance in intermediate and other products such as VGO. On the renewable side of the business, we expect a total throughput of renewable feedstock to average between 3,000 and 5,000 barrels per day, or approximately 38% to 63% utilization on our total Phase 1 production capacity of 8,000 barrels per day.
We anticipate an efficient total production yield of renewable diesel between 96% to 98% for the first quarter as well. Anticipated OpEx per barrel encompassing both conventional and renewables businesses on a fully consolidated basis is projected to range between $4.59 and $4.95 for the quarter. We anticipate total capital expenditures for the first quarter to be between $20 million to $25 million. As of the fourth quarter 2023, Vertex has entered into fixed-price swap contracts covering approximately 40% of expected diesel and distillate production for the first quarter of 2024 at a weighted average swap price of $28.39 per barrel. I’d now like to turn the call to Chief Commercial Officer Doug Haugh.
Doug Haugh: Thanks, Chris. First, I want to share that our feedstock optimization strategy has progressed according to plan. As expected, our temporary LCFS pathway approval last year resulted in us receiving LCFS credits for imports to California producing a $9.6 million benefit. We were also able to complete our runs and the data collection required to support our provisional LCFS application for 4 Vertex specific pathways covering soy, canola, Tallow and DCO. This application has been submitted to CARB and we expect that we will receive LCFS credits based on these improved CI scores for imports into California during 2024, which will improve our per gallon credit values as compared to the temporary CI values received last year.
With our provisional pathway application filed for our first 4 feedstocks, we have shifted our focus to completing additional 90-day runs of lower CI feeds, specifically UCO and poultry fat. These feeds represent not only improved CI values but also outright lower cost. We’ve started aggregating the inventory needed to support these runs and expect to complete the runs for these additional feeds during the second quarter. Across all families of feedstocks, the team has been able to double our supplier base over the last quarter, and the market continues to provide tremendous support for our facility. Logistically, we’ve continued to receive supply primarily via barge and rail. Both the addition of UCO and poultry fat to our supply base has added truck deliveries to our logistics mix.
We’ve started to rationalize our feedstock inventories of each grade as we build confidence in each supply chain and in each supplier. This optimization allows us to create more flexible blending schedules, and having multimodal delivery capacity across dedicated tanks for each class of feedstock allows us to capture price changes quickly as volatility in feedstock pricing has continued to be very material. Our primary message around feedstocks is one of abundant and flexible supply from a portfolio of suppliers that have been reliable and supportive. We appreciate all of them working with us as we have pursued each of these pathways and continue to build our yield curves and carbon intensity data. Through all these changes in feedstocks, run rates and hydrogen uptake rates across a wide range of blends, our plant has operated reliably and maintained high conversion rates.
This reflects both on the design, engineering and construction quality we have now seen evident in plant performance, but also just as importantly on the commitment, skill and cohesive team work with which our trading operations and engineering teams have executed this demanding plan. In conjunction with building a new business in renewable diesel production, we continue to build out our supply, trading, risk management and commercial marketing capabilities. These capabilities along with our continued development of internal logistics, barge and commercial delivery capabilities position us to continue to reduce cost and secure improved netbacks and margins for our conventional refineries and our renewables business. With our initial offtake contracts starting to come up for negotiation, we could begin now to use these supply, trading and commercial capabilities across all of our products to improve our netbacks for our production.
We have already seen benefits by leveraging our internal capabilities to bring a portion of our Marrero production to where we have blending capacity in Mobile to produce a higher value finished product. This product also supported the launch of our marine fuelling business that allows us to capture retail margins on those barrels versus being traded in the bulk wholesale market. We are still in the early stages, but this is the type of work we are doing to bring continuous improvement. On netbacks and build a reliable customer base around the business that maximizes the value of all our products.
Ben Cowart: Thank you, Doug. Once again, our team is doing a great job of managing our operations, reducing risk and executing the expansion of our business capabilities. As we navigate the first quarter of 2024, we anticipate facing similar challenges and market fluctuations experienced in 2023. Our priorities will continue to be safety and reliability with a continued focus on cash management, cost reduction and capturing enhanced margin opportunities. I wish to reiterate to everyone on this call that our strategic decision to acquire the Mobile Refinery was driven by the significant long-term potential we saw and continue to see in the renewable sector. Our substantial cash investments in renewables are testament to our confidence in this decision.
The renewables diesel project was launched with remarkable speed and cost effectiveness, yet it represents a multi-year endeavour within a still evolving market. Reflecting on the journey, 2022 was about establishing our foundation. 2023 about building the structure and 2024 is focused on advancing this framework towards our 2025 goal. By which time we expect our transformation into a leading energy transition company to yield results that better reflect the value of this business. Until then, we have work to do, and we look forward to keeping you updated on the exciting milestones we have planned ahead. Thank you. I will turn this call now over to the operator for questions.
Operator: [Operator Instructions] Your first question comes from the line of Eric Stine with Craig-Hallum. Your line is open.
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